The Difference between Tax Negligence and Tax Fraud

What happens when the IRS finds an inaccuracy on your return? Mistakes are a fact of life – even mistakes on taxes – and the IRS recognizes this. After all, taxes are complicated and leave room for error and misunderstanding. Nevertheless, mistakes can be costly or, even worse, lead to tax fraud charges. In this post, Bayou Booking & Tax Services describes the difference between tax fraud, negligence, and mistakes.

The Difference Between Tax Negligence and Tax Fraud

Ordinary Mistakes

In most cases, mistakes won’t lead to accusations of tax fraud or criminal charges. However, mistakes can and do happen. When they do, they’re likely to incur penalties. For example, if you underpay due to a miscalculation, the IRS can charge a monthly fee until you pay it. The fee is generally a percentage of the amount owed. Of course, they don’t charge a penalty if you overpaid and the IRS owes you a refund.


According to the IRS, negligence constitutes any failure to maintain adequate books and records, exercise ordinary and reasonable care in preparing tax returns, or reasonably comply with regulations. Negligence typically involves a significant tax underpayment situation.

The IRS assesses additional negligence penalties if it determines that you recklessly took a position on your return with little or no regard for its accuracy. On the other hand, if you acted in good faith and had a reasonable basis for your position, you will not have to pay a negligence penalty. Your ability to defend your position with good records and documentation plays a significant role in this determination.

Civil Fraud

Tax fraud is characterized by the intention to deceive and knowingly provide false or inaccurate information to avoid paying taxes. Tax fraud can also occur in knowingly providing false information to receive tax refunds. The IRS steeply increases penalties as a result of fraudulent underpayment. Moreover, they can also pursue criminal prosecution. Taxpayers found guilty of criminal tax evasion face massive fines and jail time. At the end of the day, fraud simply isn’t worth it.

Negligence or Fraud?

In the end, it costs more to commit fraud than it does to make a negligent mistake. Negligence includes carelessness or mistakes made recklessly, while fraud entails deliberate lies. That said, the difference between negligence and fraud is not always so apparent since often times what decides the matter is intent alongside whether reported items can be corroborated.

Auditors are trained to spot red flags that indicate potential fraud. When telltale signs indicate that something is amiss, you’ll stand a much better chance if you can substantiate your claims and reasoning. If you’re successful, your chances of facing civil fraud penalties will be slim. As always, good record keeping is your best friend.

Bayou Can Help

Bayou Bookkeeping & Tax Services provides tax filing, bookkeeping, payroll and tax services, and other services to businesses all over Walker and Baton Rouge. For tax filing and professional accounting services you can trust, request a consultation or call (225) 442-1137 to schedule an appointment.